Is Instagram worth $1 billion? It is to Facebook!

Facebook is essentially about photos, and Instagram has found and attacked Facebook’s achilles heel – Om Malik, Founder of GigaOM

An app! It is an app that allows users to embrace their inner photographer using their smartphones to filter their photos and make them look more interesting. The name of the app is Instagram and this week, the company was bought by Facebook for $1 billion plus shares. This acquisition is bound to get tails wagging, especially by others trying to get the value of their own start-ups realised.

The downside is it will fuel unrealistic expectations by startups and cause headaches for venture capitalists and investors. But when a company that has only 13 employees, no business model, no revenue and around 50 million users gets this kind of price tag, it isn’t surprising when expectations go sky high.

But it raises some questions. How did Instagram get valued at $1 billion? Why does Facebook want Instagram? What can we expect from Instagram and Facebook in terms of features?

How did Instagram get valued at $1 billion? 

This is a real head scratcher because I just can’t understand how an app, which only purpose is to bring back the 1980s, can get such an valuation. But we should not take anything away from the Instagram team and their leader Kevin Systrom for their hard work over the past two years and the amazing traction they have achieved – five million photos uploaded each day and a massive user base.

But is this part of a tech bubble that will never pop? I posed this question to Evgeny Tchebotarev who is the COO and co-founder of a startup called 500px to get his thoughts.

Evgeny says this sudden acquisition took him and many others completely by surprise. He brought up two very interesting points from a entrepreneur and valuation standpoint. While he is happy for the Instagram team who fully deserved the achievement for scaling their service upwards, he is surprised by the high price. Only a handful companies – Facebook, Google and Apple, can pull off that sort of buy out.

He thought a potential buyer would have been Apple because that would mean it would have kept it exclusive to Apple devices. Could this particular purchase then usher in more entrepreneurs who, instead of creating a stand alone product, target products that are company weakness specific?

Does this now mean the technology behind the product is not always the formula of a successful company? Does the volume of users and their loyalty warrant that kind of price tag? The reason I ask this is because if you look at apps like Camera+, Hipstamatic and other mobile photo sharing apps, you can see their user numbers are no way close to Instagram, yet all their products share the same purpose.

Why would Facebook buy Instagram? 

The first thing that came to mind is encroachment. Facebook saw Instagram encroaching on a property which Facebook is doing everything it can to dominate in and that is mobile. Paul Kedrosky of the Kauffman Foundation says it is not just that it is a photo sharing app but that ”it was a way that people were communicating with each other, the same way they might have on Facebook, and that’s why Facebook sees it as a fast-growing competitor”.

Facebook was never a mobile-centric company. Its focus has always been desktop first. One could say Facebook’s mobile strategy is mediocre at best because the operational side is buggy and slow.  Essentially, Instagram attacked and I quote Om Malik of GigaOM “Facebook’s achilles heel” which is mobile and its viral photo sharing ability. Facebook has responded with, if you can’t beat them, buy them.

Will there be any new features?

The first thing that immediately comes to mind is Facebook check-ins. We know that Facebook check-ins have been disappointing in regards to uptake. But Instagram’s geotag feature which has been powered by Foursquare’s location database spells an amazing opportunity for Facebook check-ins.

We know that Facebook has been rolling out targeted advertising in recent months and this has opened up an opportunity for it to improve its monetisation strategy on location and photos, especially with mobile clients. The other thing I can see happening is Instagram will have a friend tagging option that allows users to tag their Facebook friends.

I have mixed feeling on why this news has got me feeling excited especially in regards to the lessons that entrepreneurs and up and coming startups can learn from the Instagram story. The tweet below sums it all up. If only we could all be so lucky.

Who needs a monetization strategy? Just build an amazing product, and sell to Facebook, Twitter or Google.

— Jordan Raynor (@JordanRaynor) April 9, 2012